Why Organic Food Costs So Much

Organic produce, once sold only in specialty shops, is now available in pretty much every supermarket chain: from the tony Whole Foods to the everyday Wal-Mart. And even as consumers scaled down their budgets during the recession, many kept choosing organic fruits, veggies and dairy over their conventional counterparts — despite their higher cost.

That organic food costs more is ironic, considering the fact that for the vast majority of farming history, agriculture was inherently organic.

During the 20th century, however, a large supply of new synthetic chemicals was introduced to the food supply. That enabled farmers to produce much greater yields in more parts of the world, and through extended growing seasons.

Today, organic foods differ from “conventional” foods because they are made in a way that limits or excludes the use of non-organic pesticides, insecticies and herbicides during production (certain non-organic fertilizers are still used). Livestock must be reared without the routine use of antibiotics and hormones. In most countries, organic produce is regulated to exclude genetic modifications.

So if organic food contains “less,” why does it cost more?

1. Subsidies

The true cost of a food product is not simply the price for which it is sold. Non-organic food is often influenced by subsidies and other national or regional support schemes. According to the House Appropriations Committee, mandatory spending on farm subsidies was $7.5 billion in 2008, compared with $15 million for programs for organic and local foods.

A crop is therefore made artificially cheaper through a production-oriented subsidy. At the same time, some of the negative consequences of conventional farming — polluted water runoffs, methane emissions or high energy inputs — are not accounted for in the price of food.

So while the overall cost to society of producing food organically is actually lower than the cost of conventional production, because of the distorting effect of subsidy schemes, end consumers should realize that it isn’t that the price of organic food is too high – rather, the price of conventional food is too low.

Better pricing policies, at the government level, could address this problem.

2. Economies of Scale

Economies of scale arise when the cost of a unit falls as output increases. Simply put, the more you can produce, the lower price you can afford to ask for that product.

Economies of scale are the main advantage of increasing production and becoming “big.” A large company can pass on lower costs to customers through lower prices and, as it gains customers thanks to lower prices, increase its share of a market.

That obviously hurts smaller businesses. For example, a large factory farm can invest in expensive technology that improves stock control or accelerates fertilization. A small farmer would likely not be able to afford this technology: given the smaller amount of product he can sell he may not be able to make up for the cost.

In the organics market, production costs are typically higher due to alternative production practices (higher animal welfare standards, restricted use of chemicals, and soil fertility enhancement), smaller yields and greater manual labor. Without the use of agrochemicals – designed to make food cheaper to produce – an organic grower must spend far more time working crops to prevent disease and destruction. An organic farmer will also lose a far greater percentage of the crop than a chemical farmer. These costs associated with handling small quantities for niche markets means that it’s harder to achieve economies of scale. As a result, prices remain high.

3. High Associated Costs

As the organic food sector develops, the price premium should decline slowly thanks to more accurate pricing schemes, increased demand and improved production efficiencies. But still, chances are a premium will remain due to the costs built into the organic industry. These include expensive certification costs and high shipping prices, as organic farms tend to be located further from major cities.

Additionally, there is little incentive for conventional farmers to switch to organic farming: yields and profits are substantially reduced and recover slowly, making a transition prohibitively costly.

Organic food is typically 20% to 100% more expensive than a conventional counterpart. In recent years, the gap has narrowed as discount retailers like Wal-Mart have offered organics and more private-label (generic) organic products have become available.

Still, while the $10.8 billion industry is booming, it’s not even close to overtaking conventional sales. When all is said and done, less than 10% of U.S. consumers buy organic items regularly, mainly due to their higher cost.

Though organics have been around for a half-century, unknowns still rule. Long-range studies are few and far between and most experts are unable to determine when pricing will change. For now, while pricing schemes distort the market and overall organic production costs remain very high, consumer education drives the market.

The increase in demand, required to lower prices, is likely to happen only if shoppers develop a pro-organic philosophy before they enter their grocery stores.

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